The government last night abandoned controversial plans to remove the right of failed asylum seekers to appeal to the high court after the former lord chancellor, Lord Irvine, threatened to lead a rebellion in the upper house.

To the delight of the judiciary, which warned that the proposal would erode the rule of law, the lord chancellor, Lord Falconer, announced that he would amend the asylum and immigration bill.

His move avoided the embarrassing prospect of a full-scale rebellion in the upper house, which would have pitted Lord Irvine, Tony Blair's former pupil master, and leading members of the judiciary against the government.

Lord Falconer announced the climbdown after admitting that Labour's last lord chancellor had "forcefully made representations about the bill".

He added: "I believe that we can have the necessary judicial oversight in the system by the higher courts and obtain the aims of speed and reduction of abuse... I am prepared in those circumstances to bring forward amendments to replace the judicial review ouster with a new system allowing oversight by the administrative court in those decisions."

Lord Falconer declined to give details of the changes which will be introduced when the bill reaches its committee stage in the House of Lords. But his announcement means that failed asylum seekers will be allowed to appeal in some form to higher courts. Judicial review would have been all but impossible under the home secretary David Blunkett's proposal to streamline the system.

Lord Falconer said it was still important to ensure that the system was reformed. He also said the government would crack down on lawyers who abuse the system.

"Reform of the appeals process goes hand in hand with reform of the legal aid system, including thresholds on legal aid and by a clampdown on unregulated immigration advisers, to put a stop to those whose only advice is how to exploit the system," he said. "We want to ensure that those who need advice, because their claims have merit, get it."

The lord chief justice, Lord Woolf, who had condemned the proposal, welcomed the "unqualified" climbdown.

"That an appropriate system of appeals is necessary is beyond dispute," he said, adding: "What has to be achieved is a proper balance between the interests of the government in upholding the law and avoiding unnecessary expense and complexity and the interests of appellants."

Lord Mackay of Clashfern, the last Tory lord chancellor, welcomed the proposed changes to the bill, which would have been "a serious affront to the rule of law". The high court would effectively have been blocked from intervening in a possible breach of natural justice by an asylum tribunal.

He added: "One must be quite careful in a difficult situation that one does not increase the difficulties and destroy justice in the meantime."